Making Sense of Non-Binding Retail-Price Recommendations
University of St. Gallen - SEPS: Economics and Political Sciences
Dennis L. Gärtner
University of Bonn - Faculty of Law & Economics
CESifo Working Paper Series No. 3024
We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer’s profit is independent of production costs and punishment strategies are chosen appropriately. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs.
Number of Pages in PDF File: 42
Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations
JEL Classification: D23, D43, L14, L15
Date posted: April 26, 2010
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